The landmark case of Commissioner of Taxation v Bendel (Bendel) has garnered attention from family lawyers because of its potential implications on tax issues in property settlements involving family trusts with corporate beneficiaries.
The case concerned the interpretation of Division 7A of the Income Tax Assessment Act 1936 (Cth) (ITAA), potentially redefining over a decade of understanding of its application in the context of unpaid trust distributions to corporate beneficiaries.
Division 7A & Bendel
Division 7A of the ITAA aims to prevent private companies from distributing profits to shareholders or associates by way of a loan and avoid paying tax.
Until Bendel, Division 7A was not considered to be applicable to unpaid trust distributions to a corporate beneficiary. In Bendel, however, the Australian Taxation Office (ATO) sought to impose the same tax treatment on unpaid trust distributions where:
- A corporate beneficiary is presently entitled to a share of net income, and has the right to demand and receive payment, but has not called for payment; and
- The trustee of the trust has not set aside an amount equal to that entitlement to meet the entitlement of the corporate beneficiary.
On appeal, the Full Court found in favour of the taxpayer and overturned the primary determination that an unpaid trust distribution in these circumstances is a "loan" falling within the scope of Division 7A.
The decision is under appeal to the High Court, so the position is still uncertain.
Bendel and family law property settlements
Division 7A compliance and consequences for companies is an issue which must be considered as part of a family law property settlement to ensure the party retaining the company is not exposed to an unintended, and unexpected, tax debt.
The ATO's attempt to impose tax treatment on unpaid beneficiary entitlements could cause very significant and unexpected taxation consequences, and consequently, heavily impact the financial outcome of a family law property settlement.
While there is nothing to panic about yet given the Full Court's disagreement with the ATO, it is important that family lawyers and professional advisers are cognisant of Division 7A and other taxation implications where companies and trusts are involved generally. But it is also essential that they are aware of changes to legislation and case law, such as Bendel, which may create issues to be considered in a family law property settlement.
The KKI Family Law team will continue to stay up to date as developments occur.
The KKI Litigation team has also written on the Bendel decision as it relates to Unpaid Present Entitlements (UPEs) from a trust to a corporate beneficiary.
Originally published Jul 28, 2025
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
